Aave launches "Credit Delegation" feature! Bringing uncollateralized loan services to Ethereum
In addition to the continuous surge in token price, the decentralized lending protocol Aave (LEND) saw its founder and CEO Stani Kulechov officially announce the launch of the "credit delegation feature" on the Aave protocol last night, enabling uncollateralized loan services and offering various new use cases for DeFi.
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Aave - Unsecured Loans
Decentralized lending protocol Aave (Lend) announced the upcoming launch of its "credit delegation feature" on Twitter on July 5. The project's founder and CEO, Stani Kulechov, officially activated the credit delegation feature on the Aave protocol last night, marking the realization of unsecured loans in the DeFi space. Stani Kulechov stated in a tweet:
"Aave has officially launched the original credit delegation, where depositors can delegate their credit lines to others. For example, Karen deposits assets like USDT into Aave and delegates the credit line generated by this asset to Chad, who can then borrow assets such as ETH from the Aave protocol."
@AaveAave is starting native Credit Delegation (CD). Aave depositors can delegate their credit lines. For example, Karen deposits an asset such as USDT to @AaveAave and delegates her credit line to Chad, who draws funds such as ETH from Aave Protocol. pic.twitter.com/MwU1faThIi
— stani.lens (🌿,👻) (@StaniKulechov) July 7, 2020
Operation of Credit Delegation
The operation of credit delegation allows depositors (Karen) to provide assets like USDT on the Aave platform as usual, but they do not use this deposit or use it as collateral to borrow money. Instead, they authorize the credit line generated by the collateralized assets to borrowers (Chad), enabling borrowers to borrow assets from the Aave protocol without collateral. Although unsecured loans may seem to bring systemic risks to the protocol at first glance, in reality, each unsecured loan is still over-collateralized within the system.
On the other hand, Karen and Chad must also sign a legally binding on-chain agreement, which will clearly define loan terms such as interest rates and repayment periods. The agreement will be developed and maintained by the smart contract system created by OpenLaw, a company supported by ConsenSys. Aaron Wright, co-founder of OpenLaw, stated in an interview with The Block that having a real, automatically generated contract "can give weight to the real world, not just the encrypted world." If Chad does not fulfill the agreement, as long as they are in the same jurisdiction, Karen can use the agreement as evidence to take legal action against him. Aaron Wright pointed out that this mechanism can make DeFi more attractive to traditional companies that emphasize regulatory protection.